Destructive Corporate Leadership and Board Loyalty Bias: A case study of
Michael Eisner’s long tenure at Disney Corporation
Abstract
Destructive corporate leadership occurs when boards fail to adequately supervise or control a
narcissistic CEO. The resulting “toxic triangle” conditions are, we argue, surprisingly
common in widely-held corporations. This implies that current corporate governance codes
that rely almost exclusively upon the diligence of independent board members to monitor and
control senior executives are frequently an inadequate defence against a determined and
destructive CEO that is prepared to ruthlessly cultivate and exploit board loyalty biases.
We illustrate these issues with a detailed case study of Michael Eisner’s 20 year reign at the
top of Disney corporation. Whilst Eisner’s narcissistic personality and his increasingly
irascible behaviour in the latter stages of his career at Disney resulted in massive destruction
of shareholder wealth, the case study focuses on the governance failures that this represents
and we conclude with some recommendations for improving board oversight via reducing the
likelihood that boards will succumb to loyalty biases.
Key words:
Board loyalty biases, Corporate Governance, Leadership, Narcissism.
1
Destructive Corporate Leadership and Board Loyalty Bias: A case study of
Michael Eisner’s long tenure at Disney Corporation
Introduction
In this paper we argue that widely-held public corporations, characterised by “strong
managers and weak owners” (Roe, 1994) are exposed to what Padilla, et al (2007) identify as
“destructive leadership” risks which, due to the power of incumbency and board loyalty
biases, current corporate governance codes and ostensibly independent corporate boards
appear to do little to mitigate. As Padilla et al argue, destructive leadership and the extreme
negative organisational outcomes it generates, typically requires the existence of what they
refer to as an interacting and self-reinforcing “toxic triangle”, i.e., a combination of
“destructive leaders, susceptible followers and conducive environments”. We argue that the
widely-held corporation is particularly prone to generating such “toxic triangle” conditions
and outcomes. Indeed, we suggest that the position of CEO overwhelmingly attracts
narcissistic individuals and that the experience of incumbency, i.e., exercising power over
people and corporate resources, not only greatly reinforces these narcissistic behavioural
traits, but also increases the opportunities of entrenched CEOs to pursue personally satisfying
but value destroying corporate strategies. The frequency of widely reported instances of
avoidable corporate wealth destruction by misguided, but entrenched, CEOs is indicative of a
systematic governance failure. CEOs behaving badly is not in itself a public issue. What is,
however, is the fact that such CEOs tend to experience few difficulties in obtaining the
uncritical, and therefore inappropriately loyal, support of even formally independent boards
to pursue, often for long periods, their failing corporate strategies.
Our argument is not, therefore, that Eisner was a uniquely bad or unethical CEO; we merely
argue that Eisner was given the opportunity to entrench himself at Disney and to dominate
the board to an extent that allowed him to use the resources of a large public corporation to
pursue a range of purely personal but costly conceits inconsistent with his duty to
shareholders. The underlying issue is one of poor governance and board failure to recognise
that the position of CEO in a widely-held firm necessarily implies a major concentration of
power. The position not only bestows on the holder immense authority, control over
resources, reporting processes and over the internal career prospects of subordinates, but also
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a high degree of power over board decision making. Intriguingly, Eisner has recently
highlighted the danger of having a narcissist such as himself in sole charge of a corporation:
“the spotlight accommodates one person a lot easier than two. But it takes real trust
and understanding for both sides to be satisfied with that arrangement.” (Eisner and
Cohen, 2010)
Our case study will indicate, from the outset, the Disney board failed to appreciate that
power corrupts, and that the exercise of untrammelled corporate power produces
psychological and behavioural changes in power holders, on their subordinates and upon the
board of directors. Disney’s overly uncritical board simply encouraged a narcissistic and
charismatic CEO to turn into a “destructive leader” through their collective failure to exercise
adequate control over his behaviour. As Eisner became more entrenched over time, the board
increasingly displayed a pronounced and inappropriate “loyalty bias” that rendered them
uncritically loyal to him long after it had become apparent to outsiders that Eisner was
operating Disney largely as a personal fiefdom that was destroying corporate value. Whilst
the board had a clear fiduciary duty to remedy this situation, say by initiating changes to the
senior management team, Disney’s board proved itself to be a “silent watch dog”, i.e., it
remained steadfastly loyal to Eisner until the external pressures coming from shareholders
and a hostile takeover bid finally forced the board’s hand in 2002.
Our analysis of Michael Eisner’s long – and ultimately disastrous - tenure at Disney
corporation indicates that excessive and largely unchecked, executive power can be expected
to result in destructive outcomes for other stakeholders. Whilst we do not deny that existing
corporate governance mechanisms and the market for corporate control may prevent the vast
majority of widely held firms from the very worst consequences of “destructive leadership”
the removal of underperforming executives is often a quite belated response to consistently
poor corporate outcomes, e.g., as in the Disney case We suggest changes in corporate
governance that, by institutionalising (legitimate) dissent, may help to reduce the instinctive
tendency of boards to display excessive loyalty to their CEOs. We argue that a significant
reduction in board loyalty bias is likely to increase shareholder welfare through facilitating
the early identification and speedy removal of CEO’s that succumb to hubristic and
destructive pressures.
The remainder of the paper is structured as follows. We first examine the concept of
“destructive leadership”, the components of the “toxic triangle” and the psychological
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processes associated with power holders such as CEOs. This is followed by an examination
of the characteristics of the public corporation. The Eisner/Disney case is then described and
analysed to illustrate how this institutional set-up is capable of enabling an entrenched and
hubristic CEO to dominate a board of directors and to hold onto office even after a succession
of disappointing years of corporate performance, declining share prices and several widelypublicised fall-outs with other senior executives and key suppliers. Though the case indicates
that eventually Eisner was ousted this only happened after much corporate value had been
destroyed and his removal necessitated a vigorous campaign by key disgruntled shareholders
and a hostile takeover attempt by Comcast.
The case first examines the factors that led to Eisner’s entrenchment. In brief, upon
being “headhunted” in 1984, Eisner was able to negotiate an extremely “generous” deal and,
after being credited with “saving Disney” (and being further generously rewarded) after the
share price had more than doubled over his first 5 years at Disney, Eisner was able to create
an acquiescent and uncritically loyal board that failed to adequately monitor or control many
critical decisions. The case examines the failure of the board to critically evaluate his
performance or to impose discipline. We argue that the acquiescent Disney board
encouraged delusional thinking and hubris and, particularly after the death of Frank Wells,
Eisner was largely free to indulge himself in pursuing personally gratifying but non-value
creating projects that had a significantly negative impact on Disney’s return on capital and on
its share price. Whilst Disney’s performance declined, Eisner’s generous compensation
package and his increasingly irascible behaviour and fall-outs with key stakeholders, did not.
The ensuing bad publicity that arose from linking these three issues was perhaps instrumental
in galvanising external opposition to Eisner’s continued tenure.
The case illustrates that whilst managerial exploitation of structural impediments to dissent
and loyalty biases do exist and can persist for some considerable time, it will nevertheless
tend to be self-limiting if not accompanied by good performance.1 Eisner’s apparent
entrenchment delayed, but did not prevent, his eventual loss of authority stemming from a
long and destructive period of corporate performance. Finally, we suggest organisational
mechanisms and changes to corporate governance that may help reduce corporate exposure to
destructive leadership risks.
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The Toxic Triangle of Destructive Leadership
In this section we review the behavioural and psychological literature on corporate
leadership. In particular, we first analyse why many corporate leaders appear to have
extreme “narcissistic” personalities, characterised by a high degree of “self obsession and
paranoia” and who “use a sense of entitlement, self-aggrandizement, denial and
rationalizations to justify anything they do” (Duchon and Drake, 2009, p 301). As some
degree of narcissism seems to be an essential component of any effective leader, we then
examine the circumstances and processes that turn a minority of such individuals into
“destructive narcissists”. Destructive narcissists are leaders that develop a pattern of
behaviour that involves committing significant corporate resources for self-gratifying, and
hence, unethical ends and, as a consequence, end up being responsible for causing significant
negative outcomes for other corporate stakeholders.
It has long been known that even highly ethical and egalitarian individuals upon being put in
a position of power over others quickly succumb to the “metamorphic effects of power”
(Kipnis, 1976); that is, they “become puffed up with their own importance” and they begin to
view themselves as superior to those they have control over. These psychological changes
tend to be reinforced as subordinates with different views exit or keep quite whilst those with
ambitions for preferment and resources become obsequious and provide uncritical support for
whatever the leader proposes. As Lord Acton famously observed “power tends to corrupt
and absolute power corrupts absolutely” and therefore it ought not to be surprising that
significant behavioural and ethical changes tend to occur with the exercise of power. Such
changes in psychology and behaviour, however, tend to be fairly limited in the case of
egalitarian individuals, those that see themselves as simply temporary holders of power and
who seek to involve subordinates in decision making and are not undermined by subordinates
speaking their minds and openly disagreeing with them. Unfortunately, such leaders tend to
be relatively rare since positions of power in organisations have been found to
overwhelmingly attract “narcissistic” - though apparently “charismatic” - individuals that are
able to both charm appointment committee members whilst at the same time having a
personality characterised by a lack empathy for others, an exaggerated belief in one’s own
importance and sense of entitlement and with a strong psychological need to have power over
others (see, for example, Duchon and Drake, 2009, Amemic and Craig, 2007, 2010).
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A widely used definition of a narcissist is a person that displays 5 or more of the
following characteristics (Amemic and Craig, 2010):
“1. Has a grandiose sense of self-importance.
2. Is preoccupied with fantasies of unlimited success, power, brilliance and beauty.
3. Believes that he or she is special and unique.
4. Requests excessive admiration.
5. Has a sense of entitlement to especially favourable treatment.
6. Is interpersonally exploitative.
7. Lacks empathy with the feelings and needs of others.
8. Is envious of others or believes that others are envious of him or her.
9. Shows arrogant, haughty behaviours and attitudes.”
As indicated earlier, the experience of power tends to greatly reinforce these preexisting (potentially socio-pathological) behavioural tendencies associated with the
narcissistic personality (Kets de Vries, 1991; Padilla et al, 2007) However, it ought not to be
inferred that a sensible default hypothesis would therefore be to simply assume that all
narcissistic personalities should be avoided because once they become leaders they are
potential monsters and manipulators, prone to delusional thinking and likely to abuse their
power at every opportunity in order to act out at others expense some grandiose internal
drama. Narcissism is often associated with many highly valued human attributes such as
creativity and vision as well as some essential managerial skills, not least of which is the
ability to command loyalty and to persuade others to do things that they would not otherwise
do. Thus narcissistic personalities may often be highly creative, visionary and energetic
corporate leaders. In practice, therefore, the contribution of many CEO’s is often not at
variance with the widespread accepted belief that CEO´s are generally indispensible, wellqualified (and generously paid) champions of shareholder value, without whom the
corporation would be rudderless and lacking in focus. Interestingly, managers’ own selfperceptions, as Kahnehman and Lovallo (1993) have noted, are remarkably similar to that of
shareholders and other corporate stakeholders:
6
“managers do not deny the possibility of failure, their idealised self-image is not a
gambler but a prudent and determined agent, who is in control of both people and
events.”
Not surprisingly then, far from all narcissistic leaders turn out to be what Amemic and
Craig (2010) label as “destructive narcissists”. Even though the primary characteristics of
individuals that seek to be leaders are those most closely associated with charismatic
narcissists and accepting that the experience of power is likely only to further corrupt the
already deficient ethical compasses and behaviour of such individuals, there are other factors
that suggest why is it that relatively few organisations led by such people appear to suffer
extreme negative outcomes and/or become associated with unethical behaviour or financial
scandal. The primary factors concern the fact that relatively few organisations in Western,
Liberal democracies provide leaders with untrammelled power or resources to do as they
please (Morck, 2008). Most organisations have a variety of internal checks and balances,
reporting mechanisms and avenues for legitimate dissent, as well as the existence of
competition and other external economic pressures, labour mobility, professional
associations, Unions, a free press and a range of legal safeguards that constrain executive
discretion. In the case of public corporations, the “public good” characteristics of monitoring
and the relative costs of shareholder voice (intervention) versus exit (sell) strategies, make it
unrealistic to expect individual shareholders to be able or willing to effectively monitor,
evaluate and discipline managerial behaviour2.
As Roe (1994) has pointed out, this has produced organisations characterised by “strong
managers and weak owners” and, as a consequence, the primary organisational counterweight
to the power of the CEO is the board of directors which collectively has a legal duty to ensure
that the business is being run in the best interests of its members. There are two obvious
difficulties in relying upon the board of directors to monitor and discipline managerial
excesses. First, the CEO and other senior managers are typically also members of the board
and second, despite corporate governance codes imposing special responsibilities upon the
independent board members to monitor and discipline executives, in law, no such distinction
exists and all board members are deemed to be equally responsible for the good governance
of the corporation. This situation whereby independent directors are both part of the top
management team whilst also being expected to act as the monitors and disciplining
mechanism in regard to managerial behaviour creates a conflict of interest that independent
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directors tend to psychologically reconcile by developing an unquestioning loyalty bias
towards the current management team (Ezzamel and Watson, 1997).
Figure 1 about here
The “Toxic Triangle” framework developed by Padilla et al (2007) shown in Figure 1
suggests, the extreme negative outcomes associated with destructive leadership requires not
only the presence of destructive leaders but also the enlistment of “susceptible followers” and
the development of appropriately “conducive environments”. In the corporate sphere,
however, the high degree of discretion afforded to senior executives, along with their control
over corporate resources and the employment, pay and promotion prospects of subordinates,
provide the means by which unprincipled charismatic leaders are normally able to ensure that
they suffer no significant internal opposition from employees or from a shortage of
enthusiastic supporters occupying – or wanting to occupy - key positions within their
organisations. Unfortunately, the third dimension of the toxic triangle, a conducive
environment, is also something that a determined CEO, at least one running an apparently
successful company, may be perfectly capable of generating since this only requires an
acquiescent and uncritical board of directors. Though the majority of large US and UK
companies now have boards consisting of a majority of “independent” members, due to
loyalty biases this may not be a sufficient safe guard to prevent entrenched CEOs dominating
board decision making.3 Milgram’s experiments on conformity (1974), suggest that loyalty
biases are ubiquitous and deeply ingrained in human psychology. For example, his
experiments clearly indicate that most people – irrespective of class, education, age, gender
or nationality - seem prepared to obey orders from authority figures that are clearly in conflict
with their professed moral codes and legal responsibilities. As Morck (2008) explains, even
individuals such as independent directors that neither gain from a CEO’s wrong-doing nor
have a reasonable basis for fearing reprisals for criticising CEO behaviour, appear no more
immune to this desire to obey:
“Misplaced loyalty lies at the heart of virtually every recent scandal in
corporate governance. Corporate officers and directors, who should have known
better, put loyalty to a dynamic Chief Executive Officer above duty to shareholders
and obedience to the law. The officers and directors of Enron, WorldCom, Hollinger,
and almost every other allegedly misgoverned firm could have asked questions,
demanded answers, and blown whistles, but did not. Ultimately they sacrificed their
8
whole careers and reputations on the pyres of their CEOs.” (p 180)
Narcissistic and entrenched CEOs are adept at using their control over corporate
resources and their apparently unquestionable “authority” to ruthlessly exploit this loyalty
bias which, by disabling board members critical faculties and sense of duty to shareholders,
seriously undermines the effectiveness of board supervision.
As Akerlof and Kranton (2010) argue, each of us inherits and builds our own identity, as a
Jew, loving father, or Elvis fan. Certainly being part of “Team Disney” can be compared to
various initiations Akerlof and Kranton (2010) discuss in West Point Military Academy,
Goldman Sachs, etc. Eisner could trade on subordinate’s sense of identity with Disney until
that identity meant nothing or even promoted feelings of disgust. John Roberts (Roberts,
2001) observes that many aspects of the prevailing corporate governance in Anglo-American
corporations arouse and promote the elements of ego formation we all undergo in the “mirror
stage” of infancy when mimicking and finding comfort in our Mother’s facial gestures.
Roberts (2001, pp 110) indicates the problems such a revival of childhood mirroring can
arouse.
“The mirror defines an essentially competitive, rivalrous relationship to both self and
others; and in this sense the mirror stage identifications found an interest in the
control and domination of others. At the same time, with the mistaken identity of self
and the image of self, a new vulnerability is created at the level of self; a narcissistic
preoccupation with the potentially “existence confirming” (or annihilating) look of the
other.”
Thus, as we shall discuss below, the widely-held firm with its typically deeply
entrenched senior management, can often provide the third leg of the toxic triangle, a
conducive environment for the development of destructive leadership and its baleful
consequences.
Conformity without coercion
It is fairly uncontentious to suggest that tyrannical leaders frequently induce mindless
discipleship amongst timorous subordinates. But even in the absence of coercion, leadership
is highly valued, sought after and highly rewarded when found. Thus, it is clear there is a
demand from below for leadership of some kind and perhaps even of a rather self serving
nature. Conformity and loyalty to authority thus has its own allure. Timur Kuran (1995) has
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pointed out the ubiquity of fissures between private truths and their public expression in
social life. This induces a social falsification of preferences in favour of a quiet life or social
acceptance. To achieve these goods most of us enjoy requires us to trade off our intrinsic
utility with any consequent damage to my social utility.
Crucially a few articulate “preference entrepreneurs” may pave the way for the more
timid, or simply less deeply affected majority, who while quietly resenting the crass thuggery
of the prevailing elite find it easier to just make the best of a bad job. This makes the switch
of preferences currently being falsified constantly subject to sudden reversal. This sudden
implosion is particularly marked in the unravelling of Eisner’s reign at Disney.
One very obvious reason why major corporations do not manage succession more
smoothly is simply the cushion of profits created by a dominant market position means that
they do not have to. In a striking passage of his landmark work Albert Hirschman asks (1970,
pages 5-6) why if Hamadrayas baboons, with all their personal weaknesses, can manage the
transition from ageing dominant male to emergent upstart successor so well why can’t human
polities do a better job? The reason is the logic of the Jungle dictates baboons must work
smart or starve. Hirschman states
“Most human societies are marked by the existence of a surplus above subsistence. The
counterpart of this surplus is society’s ability to take considerable deterioration in its stride.
At a lower level of performance, which would mean that which implied disaster for baboons,
merely causes discomfort at least initially, to humans.”
In this perverse sense destructive leaders need to find successful companies to attach
themselves to and dissipate the surplus of. As we shall soon show by 1994 Disney had a very
large surplus to dissipate. In this view one of the costs of having successful, market-leading,
corporations is the creation of rents awaiting dissipation by non value-adding struggles for
access to them. Corporate profit creates its own rent-seeking consumers as “there’s a slacker
born every minute” (Hirschman, 1970, p.15) and as we will see Michael Eisner certainly
enjoyed his share of slack, perks and the trappings of high corporate office.
Choosing between exit and being a loyal voice
So if the abuse of corporate power and the tunnelling out of shareholder wealth can never be
eliminated how might it be controlled at least to the point of insuring corporate survival? Two
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substitutive mechanisms suggest themselves (Hirschman, 1970). The first, exit, selling up
your shares is the standard fare of financial economics texts on corporate valuation, the
discounted pay-offs the company offers the investor in the form of dividends must justify the
price to acquire the corporation’s stock. The second, voice, is less commonly discussed in the
Finance literature. For “Voice is political action par excellence” as Hischman (1970, p 16)
expresses it. Seen in this light, it can be appreciated that Mark Roe’s “political theory” of
corporate finance nicely complements the standard finance theory taught to generations of
business school undergraduates.
Feigning loyalty may not be that easy and, as George Akerlof has pointed out (1983),
the easiest way to appear loyal may simply be to be loyal. This may be especially so in the
hothouse environment of the close knit relation between a Studio CEO and his second in
command. Given the presence of such strong, if misplaced, loyalties abuse of power by the
incumbent CEO may become far more likely.
Figure 2 presents the value of voice, as an exit retardant, over some range of
subordinate discontent. At some point even the most loyal servant will feel that their
employer or immediate superior has broken an implicit “psychological contract” established
either before joining the corporation’s employ or during some initial settling in stage (Tunley
and Feldman, 1999). But between the commencement of initial worries and the final
separating of the ways loyalty can help to retain employees who would otherwise defect.
Figure 2 about here
A very similar conclusion may be made with regard to the impact of a strong coherent, if far
from controlling, family stake-holding within Disney. Roy and Elizabeth Disney and their
representatives on the board had more than simply money at stake and cared deeply about
maintaining the iconic presence of Walt Disney and his empire in American public life.
Finance texts teach it is the marginal investor who determines the company’s cost of capital,
since for them a $100 decline in box office revenues is enough to make them replace Disney
with Universal Studios in their portfolio. So it is the marginal investor who determines the
cost of capital in this view. But it appears to be loyal, intra marginal, even passionate,
investors who determine the deployment and control of capital resources via voicing of
concerns.
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We now examine the 20 year career of Michael Eisner as Disney corporation’s CEO to
illustrate these issues, giving historical purchase to the abstractions of management theory
presented so far.
Emperor Eisner: A case study in the power of personal control in a
corporation
Michael Eisner’s twenty year reign at the top of Disney (from 1984-2003) provided
him with the longevity necessary to ensure his personality was firmly stamped on the
corporation he headed. In this section we describe the situation at Disney when Eisner was
recruited, how Eisner was appointed, the terms of his appointment and how, over time as
Eisner’s power increased, the board allowed him complete and uncritical discretion in regard
to key strategic and managerial matters. That the board allowed this is particularly salient
since by this time there was no shortage of indications that Eisner’s personal managerial style
had resulted in unnecessary conflict and fallouts with senior colleagues and that several key
decisions had been made largely to gratify Eisner’s personal ego concerns rather than on the
basis of increasing shareholder value. We also provide some analysis of Disney’s financial
performance and how, even as corporate performance deteriorated, Eisner continued to
shamelessly work the corporate board and senior management to maintain and build his
personal power and how he ultimately lost that power as the Board and senior managers,
including some family members, finally lost confidence in him in the wake of persistently
declining corporate performance. We choose Eisner not because he is a crook, or a swindler.
He is clearly neither of these things, but rather because as a icon of American business he
better exemplifies the norm of business life (as opposed to Jeff Skilling, or Robert Maxell,
who are recognized by their peer CEOs to be thoroughly bad apples). In many ways Eisner is
a paragon of American business life having been recognised as Pioneer of the year by the
Will Rogers Institute in 2003, an honour previously awarded to Cecil B. De Mille and Jack
Warner. Disney Corporation itself is a quintessential all-American institution with its
ambition of releasing “the child within us all” as its founder Walt preached. In doing so we
plunder a number of excellent accounts of his reign at Disney including one by Eisner
himself ((Stewart 2005), (Eisner and Schwartz 1999) and (Masters 2001)). In many ways
Eisner’s reign was a paradigmatic case of Roe’s “political” thesis. Barry Diller, his ex-boss
at Paramount, captured his style in a newspaper interview
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“The Board doesn’t control Disney, and the investors don’t control it. Michael
controls it.” ((Masters 2001), pp 322)
Eisner arrived at Disney in a lull in its distinguished history at the behest of Roy (E.)
Disney the son of Walt’s brother (Roy O. Disney). In the years since Walt’s death in 1966 the
Disney Corporation had atrophied under his chosen successor, his son –in-law Ron Miller.
Miller had stood down in favour of Card Walker two years before. But by 1984, when Roy
Disney approached Eisner, Miller’s inhibiting presence was still felt. Disney was widely
touted as a takeover target and Eisner felt little pressure to accept the initial offer of becoming
President of Disney. He told Roy Disney
“Roy. I’m bigger than you right now at Paramount. I make three times as
many pictures and do really well. So if I come here, I want to be President and Chief
Operating Officer.” (Stewart, 2005, pp 47)
In terms of delivering shareholder value, Figure 3, which plots Disney’s share price
over the years 1984-2003 it is clear Eisner had two successful runs in the late 1980’s and
1990’s (1987-91 and 1993-1998). However, what is particularly striking about Figure 3 is
that while the rise from the mid 1980’s was gradual the decline in the late 1990’s was
dramatic.
Figure 3 about here
Figure 4 shows Disney’s share price performance relative to the S&P 500 Composite index.
Examination of the S&P 500 price relative chart, indicates that Disney’s performance had
reached a plateau by 1992 and fell sharply from 1998 onwards. Disney’s share price decline
clearly preceded the dot-com implosion of early 2000 but simply never recovered
significantly after that. So from 1998 Disney’s performance under Eisner had essentially flat
lined. Nevertheless, over this long period of underperformance, Eisner continued to receive
very high levels of compensation.
Figure 4 about here
The proximate cause for the share price decline can be gleaned from Figure 5 which
plots the return on investment/capital employed within Disney under Eisner’s reign. The
erosion of performance within Disney during Eisner’s latter years is obvious. It is apparent
from Figure 5 that Disney’s average return on capital during Eisner’s final 10 years of tenure
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had declined by more than half relative to what had been achieved during his first 5 years in
the job. It was in these latter years that Eisner, after the death of Wells and hence even more
emboldened and unconstrained, undertook a number of huge – and ill-advised - acquisitions
as well as the Euro Disney project which, as we shall detail later, generated very little return
for the massive capital investment involved. This persistent deterioration in the return on
capital invested very much appears to be the defining characteristic of a bloated, empire
building, corporation with an entrenched and misguided management team. As was the case
with Disney, many such firms eventually become the subject of a hostile takeover bid, this
being the only way to remove the incumbent management team and thereby retrieve some
value for shareholders.
Figure 5 about here
The Early years
Immediately prior to joining Disney, Eisner had made a name for himself as President
at Paramount studios under Barry Diller’s Chairmanship. Together Eisner and Diller
developed a series of “high-concept” productions where plot and characterisation were
considered more important than big movie stars or dramatic locations and special effects.
Saturday Night Fever, Grease, Terms of Endearment and Flashdance are memorable
examples of how this philosophy worked out. Eisner articulated the basic idea of how to
make a studio work as follows
“We have no obligation to make Art. We have no obligation to make history.
We have no obligation to make a statement. But to make money, it is often important
to make history, art, a statement, or all three.” (Stewart, 2005, pp 32).
Eisner arrived at Disney at an initial highpoint in career as New York magazine
crowned Diller and himself “Hollywood’s hottest stars”. Disney by contrast was on the skids
its earnings having fallen by 7% in the last year and with it recovering from backing off a
hostile bid by Saul Steilberg in March 1984 by paying greenmail (buying out his stake at
above the market price) (Eisner and Schwartz, 1998,pp 117-121). Roy Disney, as part of the
deal to return to the Board of Disney, had been granted the right to appoint two other
additional board members, one of which he gave to Stanley Gold one of a pair of brothers
who were privately wealthy investors from Texas.
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The attraction of Disney to Eisner was in large part the opportunity it gave to repeat
the success he had enjoyed at Paramount with Diller. As he recalls telling Ray Watson the
head of the Search Committee for a new CEO in his biography Work in Progress (Eisner and
Schwartz, 1998, pp 122)
“You guys are ripe to be turned around in movies and television. You are in the same
position as Paramount when I went there, and ABC before that. Disney is making a
handful of features and no television at all. There are numerous opportunities to ramp
up production.”
Eisner, knowing his own value, held out for a stunning pay-package. This was a base
salary of $750 k per year, plus an equivalent signing on fee, plus 2% of all profits over $ 100
million per year, plus options to buy 510,000 options at the current stock price of $57 per
share. By 1988 Eisner would get a bonus of $6.8 million and a further $32.6 million by
exercising his options. With a total income of over $40 million dollars that year (plus $50
millions worth of unexercised options) Eisner was the highest paid Executive in America in
1988.
Eisner’s position was substantially weakened following his emergency open-heart
surgery in July 1994. He felt the need to delegate some tasks. This led him on a quest to find
a worthy lieutenant a mission he was to find difficult and ultimately fruitless (Stewart, 2005,
pp 175). The hierarchy broke down because its principal hierarch could not efficiently
execute his dominating function due, largely, to his inability to share centre stage with others.
We examine this dissemblance below.
Jeffrey Katzenberg
In reaching this position Eisner had not been slow to wield the knife on Disney’s
payroll. Over a thousand managerial posts were cut in Eisner’s first four years, with many
replacements coming in from Paramount. Chief amongst these were Jeffrey Katzenberg.
Katzenberg had been Diller’s personal assistant at Paramount and his workaholic drive soon
led others to notice him. Katzenberg was not unaware of his own worth and on being
approached by Eisner constructed an alarming wish list including
“2 seccy’s, a beach house, a corporate jet, travel-family, etc, screening room, house
maintenance? Butler?” (Stewart, 2005, pp 58)
15
In a concession which later proved controversial Katzenberg was offered a 2% annual
bonus of all the profits from productions he headed up. Further, Eisner brought in a new
Chief Financial Officer from Marriot Hotels, Gary Wilson. As the revenues from
Katzenberg’s hits rolled in Frank Wells became concerned about the 2% perpetuity in project
proceeds they had granted to Katzenberg. This problem became especially prominent after
successes like Little Mermaid, Beauty and the Beast and Pretty Woman made it clear that
Katzenberg was capable of producing true box-office magic with accompanying massive
revenues.
Katzenberg offered to relinquish this entitlement if he was guaranteed at least 75% of
Eisner’s remuneration. Frank Well’s the company President, and Eisner’s chief lieutenant
rebuffed this suggestion. This foreshadowed the later rivalry between Eisner and Katzenberg
(Stewart, 2005, 100).
By early 1991 the liability to pay the 2% of proceeds to Katzenberg had become so
worrying that Wells launched “project snowball” to calculate its total cost if Katzenberg
departed from Disney, which was beginning to look increasingly likely (Stewart, 2005, pp.
117). This began a trend of dysfunctional jousts for the loyalty of senior managers between
Eisner and his often equally gifted favoured second in command. Since “hawks don’t share”
this set the stage for much wasteful and often litigious wrangling.
Disney CFO Gary Wilson made clear public statements that he intended to transform
Disney into a growth company generating a consistent 20% earnings growth and 20% stock
price growth to match. This was what Wilson termed his “20/20” principle (Stewart, 2005,
pp. 66). With ambitions like these pressure to generate income was intense from the start of
Eisner’s control. By 1990 Eisner could sensibly speak of the last ten years as the “Disney
decade” and upped his projection of future earnings growth to 20% in his dealings with
investment analysts. But many Disney insiders were becoming nervous that an unjustifiable
arrogance was setting in and Gary Wilson himself unloaded $60 million in stock that year
(Stewart, 2005, 113) suggesting he shared other’s doubts about his own strategy.
One reason for the huge increase in pressure was the rapidly growing scale of
Disney’s operations. Success in the 80’s with Down and Out in Beverly Hills, Honey I shrunk
the Kids and Dead Poets Society had created major egos on the Burbank studio Campus.
Two senior executives at Touchstone the Disney vehicle for films orientated towards more
grown up audiences, David Hoberman and Ricardo Mestres, were increasingly unable to
16
cooperate. The solution agreed on was almost certainly worse than the disease it aimed to
cure. Mestres was now given leave to set up his own rival studio within Disney creating a
huge increase pressure to produce winners (Eisner and Swartz, 1998, pp 162).
By early 1994 the results were clear and Wells presented Eisner with a report showing
while in the first five years at Disney 35 live action films generated about $200 million a
year. In the 4 years after that 76 live action films had not produced any profits at all overall,
with only 33 of the 76 making any profit at all (Eisner and Shartz, pp. 16).
Nowhere was this pressure felt more intensely than in the animation division which
had been the origin of Disney’s greatness as a corporation but which now stood almost idle.
Hand production, frame-by-frame, of animated sequences made for labour intensive slow
work. Initially Eisner and Frank Wells intended to shut animation down. The primary
opposition to doing so came from Roy Disney to whom Eisner felt beholden because he had
got him the CEO’s position in the first place. The remarkable resurgence of animation was
due to an ambitious young vice-president Stan Kinsey who championed the cause of George
Lucas’s (of Star Wars fame) Pixar Advanced Computer Graphics. Pixar’s computer
generated graphical images held out the prospect of making films without expensive movie
stars and touchy Directors with their exorbitant budgetary demands. While Katzenberg had
no interest and preferred to focus on his traditional strength of real-life action dramas Eisner
gave the project funding to proceed largely to placate Roy Disney his sponsor. Eisner told
Katzenberg
“Roy wants to do this and he believes in it. I think we have to take a deep breath and
say yes.” (Stewart, 2005, pp 86)
Perhaps this was the upside of Eisner’s ability to sacrifice short-term shareholder
wealth to personal objectives and the allure of speculative projects. Since Pixar was at this
point largely a one customer company its salvation largely lay in Eisner’s hands. The CAPS
(Computer Animation Production System) this gave birth to produced the live
action/animation fusion Who Killed Roger Rabbit, which turned out to be a huge critical and
commercial success winning four Academy Awards.
Elsewhere he and Katzenberg implemented the “high-concept” drama principle that
had worked for them at Paramount. These were films with good story lines that appealed to a
17
wide audience, but had no big name stars or expensive Directors attached, Down and out in
Beverly Hills and Three men and a baby were notably successful comedies in this genre.
Eisner’s ambition grows: visions in the park
But elsewhere a worrying growth in Eisner’s self-awareness was becoming visible.
Early on in his leadership Eisner decided to re-launch the television show The Wonderful
World of Disney and to present it himself. This was despite a widespread belief that he was a
poor presenter and the prospect that Tom Hanks might be willing to take the role. By
presenting the television show Eisner placed himself in direct succession to Walt Disney
himself, a mantle for which there was competition from Roy Disney and other family
members. Some already felt there was an element of Icarus ascending (hubris) to Eisner’s
decision.
But it was in the theme parks division that Eisner’s more majestic vision came to the
fore. The theme parks, Walt Disney World in Florida and Disney World in Anaheim, Los
Angeles, had been a pet project of Walt Disney undertaken in opposition to his brother Roy
O. and other family members. By the time of Eisner’s arrival the parks were a steady earner,
headed by Richard Nunis, one of the few cash-generative businesses Disney had left. The
parks allowed Eisner to indulge his more creative/artistic side, especially his love of
architecture. While being a total amateur Eisner took a detailed interest in the hotel
developments in the parks, holding presentations by competing architectural teams at his
home, as well as making detailed comments himself. The more imperial vision of Eisner
began to be displayed. Stewart (2005, pp 66) quotes him as saying of these projects in a
memo to Frank Wells
“If we are going to stamp our imprint on the world, if we are going to do
something more than help people have a good time with Mickey Mouse, if we are
going to make aesthetic choices, then we have got to upgrade the level of our
architecture and try to leave something behind for others………. There is definitely
going to be a problem, trying to make some of our executives understand that we’re
not just going to be just concerned with the bottom line… and we are going to try and
make a statement – to make some history. There are some who feel its going to cost
us some additional money. I don’t think it has to, but even if it costs us a few dollars
more, I think it’s well worth it.”
18
Eisner’s penchant for the parks paid off initially when the new Disney MGM
extension to Disney World in Orlando, Florida, opened. MGM had a strong library of past
live action film glories to match the history of Disney in animation. From its opening in the
summer of 1989 the new attraction hugely increased the number of visitors to Disney World
by 5 million and also lengthened their average stay. Disney’s stock price rose by 20% during
the summer of that year as the share price reflected this revived earning potential for Disney
(Eisner and Shwartz, 1998, pp 225-227)
But by 1991 the Euro Disney costs were out of control having exceeded $2 billion. A
construction advisor brought in to reconnoitre the situation reported to Eisner “You are
headed for one of the biggest failures in construction I’ve ever seen”. The total cost of the
Euro Disney park was ultimately to exceed $4 billion. This left Euro Disney at its opening
saddled with $3 billion of debt. Part of the reason for this was Eisner’s insistence that the
park open 9am sharp on April 22nd 1992. This opened Disney up to all sorts of hold out
demands from French construction companies and their somewhat prickly labour unions. Nor
was the opening of Euro Disney the end of Eisner’s woes. Visitor numbers were far more
sensitive to the weather than in the Japanese park and Euro Disney proved unable to generate
sufficient operating income to independently service their debt. Disney by 1994 was forced to
pressurize bond holders to accept a re-structuring of the debt schedule which was hardly
likely to encourage investment in future Disney projects.
Following on from the Euro Disney debacle Eisner accepted an invitation to become
involved in the renovation of the New Amsterdam Theatre and the Time Square area in
general. By February 1994 New York Mayor Rudolf Giuliani was praising the “match made
in Heaven” that was Time Square and Disney Corporation. Indeed Euro Disney did not
exhaust Eisner’s ambitions to build new parks. Eisner also started developing plans for a
theme park focussed on American history called “Disney’s America” outside Washington DC
(Stewart, 2005, pp 147). This became one of Eisner’s few public failures when it was shut
down in the face of “nimby” protestations by Washington residents in 1994.
This high ambition underlay the increasing divergence between Eisner and his close
partner Jeffrey Katzenberg. This tension can be illustrated by the development of two
contrasting projects in the early 1990’s. Dick Tracy was a standard star-studded blockbuster,
featuring Warren Beatty and Madonna and was favoured by Eisner. Pretty Woman favoured
by Katzenberg, a fairytale love-story concerning the love of a high-class call-girl played by a
19
relative newcomer to Hollywood, Julia Roberts. Dick Tracy dominated by the co-stars affair
and their costly demands cost a whopping $47 million and grossed $100 million, a
respectable, but not thrilling return. Pretty Woman cost $ 14 million and grossed $463
million, serious money by anyone’s standards. But the real power shift from Eisner to
Katzenberg was occurring largely because of the huge success of animated productions and
the comparatively poor financial returns stemming from the real-life drama movies.
Even so, Eisner was paid handsomely for all this. In December 1992 he took home
total compensation of $197 million, partly via the exercise of five and a half million options.
That year Eisner’s name crept into the Forbes 400 rich list ((Masters 2001), pp. 273).
Eisner’s empire was clearly worth retaining. But this retention came at the cost of rebuffing
and ultimately offloading key subordinates who were rapidly emerging as threats to Eisner’s
control
By its termination in 1994 the Eisner/Katzenberg partnership had created a company
earning $2 billion profits on revenues of $10 billion. Even the live-action studio at last
produced a winner in the form of Pulp Fiction a tongue in cheek gangster movie from the
new enfant terrible of cinema Quintin Tarantino.
The rift between Katzenberg and Eisner
This contrast led Katzenberg to issue a memo to Disney executives calling for a
return to their “high-concept” story-based, cheap to produce, roots which Eisner had
pioneered at Paramount but now seemed to be abandoning. This vision of Katzenberg’s was
articulated in “The Memo” released in a briefing to analysts in Orlando in early 1991 (but
originally intended to be private) he stated (Stewart, 2005, 114):
“Our initial success at Disney was based on our ability to tell good stories
well. Big stars, special effects and named directors were of little importance. Of
course we started this way out of necessity. We had small budgets and not much
respect. So we substituted dollars with creativity and big stars with talent we believed
in. Success ensued. With success came bigger budgets and bigger names. We found
ourselves attracting the caliber of talent with which “event” movies could be
made….The result; costs have escalated, profitability has slipped and our level of risk
has compounded. The time has come to get back to our roots. It seems that, like
lemmings, we are running faster and faster into the sea, each seeking to outrun and
20
outspend and out earn the other in a mad sprint towards the mirage of making the next
blockbuster.”
This back to basics call started a rift between Eisner and Katzenberg that would
ultimately lead to Katzenberg’s departure and the demise of a creative partnership that had
dominated the movie business for a decade. Other hits ensued, The Beauty and the Beast and
Lion King, but the old magic was gone. Katzenburg’s refusal to either conform or collude
with an increasingly destructive leader induced a crisis in terms of our Figure 1 Padilla, et al
(2007) framework.
But by 1992 Katzenberg was the golden boy and he knew it. While live-action films
and the parks languished his animation studio generated earnings of $500 million in 1992. As
if sensing “project snowball’s” presence Katzenberg asked Frank Wells 1993 to report on
what the expected payout on his 2% of all proceeds on projects he headed up for Disney.
Wells already knew this would amount to $169.4 million. This gave Katzenberg considerable
leverage in his negotiations to extend his current contract beyond its 1994 expiry date.
In this spirit Katzenberg asked Eisner if he could be guaranteed the succession to
COO and President if Frank Wells were to leave (as was expected as he was known to harbor
political ambitions in the U.S Senate). Eisner found the approach distasteful while indicating
that Katzenberg could expect to succeed Wells (Stewart, 2005, pp 139). This began a
misunderstanding that would ultimately lead to the Courts. Both Wells and Eisner were well
aware that it was the teamwork of the trio that had produced the magic of the last decade and
were wary of losing Katzenberg and possibly creating a major competitor. Recently Eisner
has recalled his relationship with Wells in idyllic terms stating:
“I was the unpredictable but excitable creative executive, always coming up
with ideas –some good ones some off the wall. Meanwhile Frank was a constant
steadying influence.” (Eisner and Cohen, 2010, pp 17)
The bubbling conflict inevitably boiled over when Frank Wells died in a helicopter
crash on the ski slopes of Nevada on Easter Sunday 1994. Katzenberg sat till the following
Monday awaiting Eisner’s call. But in the event he just received a public press release telling
him Eisner was assuming Wells’ prior roles as COO and President. At a subsequent crisis
21
meal Katzenberg let Eisner know his true feelings about not being named Eisner’s second in
command
“If you can’t tell me after 19 years, if you can’t tell me, then you’ve told me
everything I need to know about my future. I’ve hit the ceiling I have to move on.
After 19 years together I have earned the right to be your partner. You should know
me by now.” (Stewart, 2005, pp 161).
Meanwhile the movie hits in animation just kept coming. Toy Story over which Eisner had
doubts proved another big hit for Katzenberg’s studio. The Lion King which opened in June
1994 was dubbed by one analyst “The most profitable picture in Movie history.” (Stewart,
2005, pp 169).
Despite this, following Eisner’s decision to rely on others to recover the situation after his
1994 heart attack Katzenberg decided to leave Disney and form DreamWorks (SKG) with his
friends the film Director Stephen Spielberg and David Geffen the famous music impresario.
Following his departure his de facto replacement Michael Ovitz sought to negotiate a
settlement to Katzenberg’s expected bonus payments. Katzenberg seemed willing to accept a
$100 million dollar payoff, which was a good deal for Disney, but Eisner felt so bitter about
the dispute he refused to settle (Stewart, 2005, pp 237). While the settlement would certainly
enhance shareholder wealth, by maybe $300 million or more, personal dislike got the better
of this outcome.
Katzenburg had already been warned by a colleague, before leaving Paramount
“Eisner doesn’t need a partner and he will never accept you as a partner” (Masters 2001 pp
299). But Katzenberg struggled a long time before accepting the truth. Loyalty, even if blind,
had become a requisite trait to remain at Eisner’s side.
Finally, on April 9th 1996 Katzenberg filed a suit in the Los Angeles superior Court
claiming a breach of contract and remuneration worth possibly as much as $12.5 billion, as
the cumulative value of 2% of all the projects he headed up at Disney during his time there
(Stewart, 2005, p449). At this point $100 million seemed like a pretty good offer. Finally, on
the July 4th weekend 1999 Stanley Gold was able to negotiate a $280 million settlement of
Katzenberg’s claim in a deal negotiated by David Geffen on Katzenberg’s behalf. But this
was only after a public hearing of an arbitration in front of former Judge Paul Breckenridge in
22
which notes taken for an autobiography of Eisner, ghostwritten by Tony Schwartz, were
subpoenaed. This brought into full public view the contempt in which Eisner held
Katzenberg, Ovitz and other senior colleagues. The press had a field day. The more
destructive elements of Eisner’s increasingly lonely leadership role were rapidly coming to
investors’ attention.
Michael Ovitz
Eisner after Wells death and Katzenberg’s departure was, Chairman, CEO, COO,
President and the creative force behind a animation studio currently enjoying fantastic
success. Unsurprisingly, his Doctor and wife begged him to delegate some of his duties
before the stress of command proved fatal. It was at this point that Eisner decided to acquire
the ABC television network in a move that would hugely expand both Disney itself and the
managerial demands on his time. Eisner had himself come up through the ranks of ABC some
twenty or so years earlier. It was now pretty clear Eisner needed help to retain control of such
a complex company. He looked to his long-time friend and confident Micheal Ovitz, who
was the leading partner in Creative Artists Agency a partnership that negotiated on behalf of
some Hollywood’s leading talent.
Recently Ovitz had emerged as a central matchmaker/dealmaker in Hollywood advising
Japanese market entrants into Hollywood like Matshushita Electric Corporation’s acquisition
of Universal Studios and the Sony corporation on their acquisition of Columbia and TriStar
studios (Stewart, 2005, pp171). In fact Ovitz had also been courted by Universal Studios
itself with a deal rumored to offer him $250 million. Eisner enticed Ovitz with the notion that
he would be his “partner” but was reluctant to specify what this meant in terms of a formal
position. Of course in reality the term had little meaning to Eisner at all.
Indeed days after Ovitz’s arrival he was summoned to Eisner’s house (they were family
friends prior to his arrival at Disney) to be informed that neither Sandy Litvack, General
Counsel and Vice-Chairman of Disney, or Steve Bollenbach the CFO were happy to report to
him even though this had been the line-of-command when Frank Wells was President
(Stewart, 2005, pp 217). Eisner refused to intervene.
One of the reasons Eisner increasingly distrusted Ovitz was his tendency to thrive on a flurry
of deals, or near deals. Eisner, at some level still adhered to his “high concept”, cheap and
profitable formula. As he expressed it to Ovitz in a memo on October 10th 1994
23
“The ‘deal’ is not the essence of Disney…Operations are the thing…I feel about
acquisitions exactly as I feel about everything else. We don’t need them. We don’t
need the overly expensive movie or television show. We don’t need the actor who has
priced himself out of the market. We do not need the acquisition that, even if it fits
strategically, is economically ridiculous.” (Stewart, 2005, 225)
Coming from a man who that year had completed the second largest acquisition in
history, albeit at a low premium, this comment must have seemed both strange and not a little
hypocritical. But Eisner’s reservations did not just concern the substance of his business
approach. He was also concerned about Ovitz’s style, especially the lavish Hollywood
parties, present giving, etc which Ovitz had almost adopted as a habit in his days massaging
the “talent’s” collective ego.
By June 1996 Ovitz could stand Eisner’s interference and undermining of him no more.
He confronted Eisner in a letter mocking his decision to house the senior executives in a
building called “Team Disney” as follows
“You’re a team destroyer not a team builder. I’ve had enough trouble inheriting your
fights and enemies. Everyday somebody complains to me about something. It is ok
because it is human and healthy….I’ve always had one goal to protect you, the
company and our relationship. Maybe you cannot have a partner. You failed with
everyone over the years, You hated Diller. You constantly complained about him
even when you went to Disney. You couldn’t stand Frank Well or his work habits for
the first five years…” (Stewart, 2005, pp 256)
This statement tags Eisner as having key characteristics of Padilla et al’s (2007)
destructive leader seeking affirmation and conformity even as he makes very unwise
decisions. It is an eloquent recasting of the “there is a slacker born every minute” doctrine
commonly expressed in the movie business - Disney’s very success created the atmosphere of
waste and arrogance which ultimately undermined its own achievements.
Despite the external appearance of “Team Disney” Eisner was unable to substantially
share the glory of the undoubted achievement under his reign. He had worked with a number
of “partners”, Wells, Katzenberg, Ovitz each of which in his view had failed him. Eisner
24
recognized the benefits of teamwork yet feared the reality of the dilution of personal control
it implied. Still the hits just kept on coming from the Disney Studios with The Hunchback of
Notre Dame grossing over $100 million and the “event” movie of that year 101 Dalmatians
taking $136 million in domestic receipts alone despite incurring a high production cost of $45
million.
Ovitz finally departed Disney on December 11th 1996. Strangely in his case Eisner
was happy to give a full pay-out due to him for termination under his contract issued 16
months earlier. This included $50 million in cash plus options on 5 million Disney shares
then valued at $40 million. Eisner consulted general counsel Sanford Litvack on whether
Ovitz could be simply dismissed for “just cause”. Certainly, Ovitz had a style of management
that grated with Eisner and was more “showbiz” than was normal at Disney. But ultimately
Disney issued a press release announcing Ovitz’s departure “by mutual consent” (Stewart,
2005, pp 274).
Eisner tightens his grip on command as performance falters
Following Ovitz’s departure in 1996 Eisner had his status confirmed by the Board by
a new ten-year contract confirming his $750,000 a year salary but now granting a staggering
8 million share options on Disney stock. The compensation consultant valuing the contact
suggested a value of $771 million for this package, although this was later revised
downwards by Disney to be $195 million in its published accounts. Even this was the best
deal ever given to a Chief Executive of a public corporation then known (Stewart, 2005,
pp.278). On reflection this offer must reflect more than a shade of loyalty bias on the
Board’s part. But as we shall see this was a Board whose composition Eisner had been very
careful to groom to his tastes.
The generosity of this settlement is perhaps less surprising when one is aware that
Eisner’s personal attorney, Irwin Russell, was both on the Board and Chaired the
Compensation Committee. Russell simply relinquished the Chair to Ray Watson when
Eisner’s pay was considered. Other Board members included the head of Eisner’s kid’s
School in West Hollywood (Roweta Bowers) and Robert Stern, the architect Eisner chose to
build his own home and who completed a number of the theme park projects. (Stewart, 2005,
pp. 279). Not that Eisner’s really needed to massage the Board anyway. As the second
biggest shareholder after Sid Bass and the Bass family Eisner had enough voting stock to
remove those whom he perceived as awkward and/or disloyal.
25
Around the time of Fox Family acquisition in the summer of 2000 two board
members, Roy Disney and Stanley Gold, were becoming increasingly concerned about the
financial performance of Disney Corporation. While at a company level Disney remained
profitable since 1995 on most standard, ratio based, metrics performance (return on equity or
assets, etc) had been heading relentlessly downwards.
Bizarrely at this point when ABC’s fortunes looked most precarious Eisner wrote a
new $9 million three-year contract for Stu Bloomberg Chairman at ABC. Both Stanley Gold
and Roy protested but it was awarded anyway. This inevitably sowed the first serious seeds
of doubt regarding Eisner’s judgment that preceded his fall.
Something needed to be done if the illusion of Disney as a growth (as opposed to an
income) stock was to be maintained. At around this time Eisner organized a retreat for
Executives in “Team Disney”. An outside consultant bought in to conduct in-depth
interviews with executives attending concluded “my research concludes you guys are not a
good team. You’re not a team at all. You’re not even a group”. On being quizzed about this
feedback one participant responded
“What Michael likes is to put six pit bulls together and see which five die.” (Stewart,
2001, pp 367)
As an image of misplaced loyalty this is an extraordinarily vivid image. That this
image contained more than a grain of truth was soon to become very apparent as Eisner’s
misrule intensified. By 2001 Eisner’s core strategy of divide and rule had left Disney factious
and weak and the harsh reality of post 9/11 America was to cruelly expose this weakness.
Disney as an American cultural icon saw itself now directly under threat from alQaeda inspired terrorism. The discovery by Spanish detectives of videos of the Golden Gate
Bridge, Universal Studios and Disneyland in an al-Qaeda cell’s apartment caused panic to set
in. The fact that the Arabic commentary suggested these were normal lighthearted tourist fare
was not sufficient to retrieve the situation. The immediate threat was perceived to be to the
parks where cancellations spiked and bookings fell precipitously. The reflex action drop of
the stock market in the days following the 9/11 attacks hit Disney hard too. Disney shares fell
from a value of $23 dollars per-share on the morning of the attacks to $17 dollars on
Thursday of the following week.
26
A major consequence of this from Eisner’s perspective was that sudden margin calls
on the Bass family’s holdings forced Sid Bass and his siblings to substantially liquidate their
position. Since they held much of their position via only partially paid for stocks (held “on
margin” in stock market jargon) the sudden price fall forced them to show cash to cover their
investment. Although the Bass family had never taken a seat on the Board they had given
unwavering support to Eisner throughout his years at Disney. The combination of the Bass’s
stake and his own substantial shareholding largely liberated Eisner from too many tedious
constraints from the Board. But the Bass family too had noticed the deterioration in financial
performance highlighted by Roy Disney and Stanley Gold. So the 9/11 margin calls may not
of been an entirely unwelcome opportunity to unload their Disney holding without too much
embarrassment (Stewart, 2005, pp 372-376). To add to Eisner’s woes the proceeds of $1
billion dollars of marketable debt, originally issued to fund the Fox Family acquisition, ended
up being diverted into panic buying of Disney’s stock in a declining market.
Eisner’s fall
As Disney’s financial performance foundered the particular coalition of corporate
players that had maintained Eisner’s control began to unravel. One irksome problem for
Eisner was the impending expiry of the production contract with Steve job’s Pixar for
computer generated animation projects. Called before a Senate Committee to give evidence
concerning video/DVD piracy and circumvention of intellectual property rights in films and
music he lashed out in an unusual display of public emotion.
“there are computer companies – computer companies , that their ads… full
page ads, billboards up and down San Francisco and L.A., that say – what do they
say? ‘Rip, Mix, Burn’…In other words they can create a theft and distribute it to all
their friends if they buy this particular computer.” (Stewart, 2005, pp 383)
This was a clear reference to Steve Job’s Apple and their recent statewide adverts for
the iMac computer. Eventually the existing concerns of Stanley Gold and Roy Disney found
common cause with Steve Jobs whose initial irritation at Eisner’s opposition to doing Toy
Story had been intensified into rage by his statement to the Senate. A coalition to unseat
Eisner had now started to emerge.
Once again EuroDisney (now renamed Disneyland Paris) would play a key role in
Eisner’s fate within Disney. On March 16th 2002 the $533 million “second gate” of the park
was at last opened. The idea behind this new attraction was to attract visitors to extend their
27
stay at the park hotels which had always been a problem at EuroDisney. Eisner attended the
opening as did the whole Board of Directors. One recently appointed director, Andrea van de
Kamp, told Rob Iger about her doubts regarding the wisdom and efficacy of the park
improvements given their corporate objectives. On hearing her objection Eisner insulted her
and questioned her loyalty. News on this storm in a teacup spread and soon board members
were gossiping about Eisner’s increasing inability to take the pressure and to successfully
turn the company around. When June’s 2nd quarter results slowed further slippage on
financial targets Stanley Gold’s concern and expression of it grew.
Concurrent to this the steady stream of accounting and corporate scandals, Tyco
International, Enron, Worldcom produced the reactionary Sarbox leglisation in their wake.
While Disney emerged with its integrity intact from this period it still had to show itself
Sarbox compliant like everyone else. When internal lawyers began this process they
concluded Stanley Gold could no longer formally be regarded as an “independent” executive
since his daughter held a $50 thousand per-year job as an advertising representative within
Disney. Eisner had the ammunition he needed to crush emergent opposition and promptly
asked Gold to resign from the Board entirely or at least step down from heading the
Nominations Committee of the Board. This opportunistic side-step badly backfired when
Gold went into open opposition to Eisner by circulating emails and memos criticizing him
around the board as a whole. An example of their content is given below
“I have had fund managers tell me they won’t buy a share of stock in a company
where Michael Eisner is CEO. I have had employees (senior executives) tell me the
company would be much better off with a new management team. Morale at the
company is at an all time low.” (Stewart, 2005, pp407)
The final meltdown was in process (Stewart, 2005, pp 401-409).
On 23rd September 2002 Stanley Gold presented the full scale of the problem. He told
the Board that since 1995 Disney had deployed an additional $24 billion in invested capital
yet operating income had declined. The compounded annual return on Disney stock since
1995 had been 1.9%, lower than the return on Treasury bills. Eisner had failed to meet his
financial projection every year for the past five, falling short by 23% in year one, 33% in year
two, 47% in year three and 55% in the fourth year. Further, what profitability there was
solely contingent on the continuing deal with Pixar and more recent hits like A Bug’s life and
Finding Nemo. But Eisner’s continuing presence completely undermined any chance of that
28
collaboration continuing. Eisner was shocked and asked the Board for a vote of confidence in
him. None was given and, as he was far too narcissistic to resign, he and Disney were left to
limp onwards for a further 17 months.
Eisner was finally removed from his position as Chairman of Disney as a result of
43% of shareholders withholding their endorsement of his position on the Board at the
Annual General shareholders meeting March 3rd 2004. He stayed on as CEO for one more
year. This unprecedented vote of no confidence resulted from all three of the major “proxy”
shareholder institutions (that hold mandates to vote on behalf of passive shareholders these
are Institutional Shareholders Services (ISS), Glass, Lewis and the California state pension
fund, CALPERS, also refused Eisner support. But Eisner’s ouster was supported by the
Fidelity investment fund and an array of smaller state pension funds including those in
Florida and New York (Stewart, 2005, pp 508-514). This last push was partially the result of
an Internet-based petition campaign against Eisner called “Save Disney” organized by Roy
Disney and Stanley Gold. Eisner was to be the victim of the impact of the “new media”, but
perhaps not in the fashion he expected.
Summary and Concluding Remarks
Narcissistic personalities have an exaggerated sense of their own importance and a
strong motivation to develop the skills necessary to manipulate others and to become leaders
where they are able to realise their fantasies to a greater degree than otherwise. Indeed,
leadership research suggests that narcissistic personalities are overwhelmingly attracted to
positions of great power and, in regard to corporate leadership, their typically greatly
exaggerated sense of superiority and self importance appears to play well with corporate
appointment committees. As a consequences, a high proportion of CEOs appear to have
narcissistic personality traits. Such personality types may often be highly creative and their
undoubted ability to convince and persuade others to do things they would not otherwise do,
certainly suggests they possess one of the essential prerequisites for leadership. Though
capable of significant corporate achievements, particularly in creative and/or highly uncertain
corporate environments, given the opportunity, such leaders risk turning into destructive
narcissists. Lax supervision by an overly uncritical board may be all that is required to
stimulate such leaders to pursue strategies that put their own sense of entitlement and
personal ego-enhancing concerns ahead of their duty to other corporate stakeholders.
29
The widely-held firm, where shareholders do not directly participate in the
management of the enterprise, appear to be particularly prone to such a fate. Indeed, Roe’s
(1994) work provides an insight into how the corporation is more than simply an optimal
technical response to the need for a least-cost contractual vehicle for mass production. In
particular the specific vehicle chosen to organize the accumulation of large amounts of
productive capital reflects a society’s economic and social history and especially its chosen
social settlement between shareholders, managers and the work force that serves them.
However, circumstances and political settlements can change, particularly in the wake of
evidence of widespread governance failures.
The “toxic triangle” framework of Padilla et al (2007) and the acceptance that even
formally independent board members are likely to display an unhealthy “loyalty bias”
towards their CEO, suggests that this organisational form, characterised by strong and often
entrenched senior managers, is capable of providing all the necessary conditions for the
exercise of “destructive leadership”. The case study evidence relating to Michael Eisner’s
tenure as CEO at Disney show clearly how a strong and well supported managerial elite can
effectively usurp the board’s ability to control managerial actions that are clearly not in the
interests of the firms’ shareholders. Entrenched and narcissistic CEOs can dominate even
ostensibly independent boards by exploiting the innate tendency of humans to display
excessive loyalty to an authority figure even when, as in the case of board members, this
conflicts with their ethical and legal duties to shareholders.
The negative consequences of excessive obedience to authority has, of course, long been a
concern in many other institutions and areas of public life such as politics, the law,
journalism and universities.4 In all these other areas, the solution has been to find ways of
“institutionalizing dissent”, i.e., where dissent is both the expected and legitimate response to
the pretentions of those that claim “authority”. Morck (2008) argues that this holds some
clear lessons for corporate governance reformers seeking to improve board effectiveness.
These institutional solutions that legitimate dissent are consistent with the implications of
Milgram’s experimental results regarding the factors that impact on the strength of the loyalty
or “obedience to authority” bias. Milgram’s results show that the tendency for individuals to
adopt an uncritical and obedient attitude towards an authority figure is greatly reduced by:
1. the presence of dissenting peers,
2. the presence of an alternative authority, and,
30
3. the absence of the authority figure during decision making.
Morck suggests that governance reforms along the lines of the Higgs (2002)
recommendations to increase the power and influence of the independent directors,
recommendations that have since been incorporated into the UK’s “Combined Code”, ought
to result in an increase the presence of both dissenting peers and alternative authorities on the
board. Along with the proposal that the independent directors have more pre-board meetings
without the CEO present, such reforms could eventually significantly increase the likelihood
that boards will act independently in the future. We are in agreement with Morck that the
Higgs (2002) recommendations regarding increasing the powers of the independent directors,
encouraging greater communications with shareholders and splitting the roles of chair and
CEO, may over time more firmly embed and legitimise dissent into board discussions.
However, as both the Eisner-Disney case and the silent boards of the failing UK banks
suggest (Holland, 2010), overcoming the loyalty or obedience to authority bias is unlikely to
be achieved without involving more fundamental changes in the power relationships between
executives, board members and shareholders. Indeed, getting boards to abandon their
instinctive loyalty biases for incumbent management is likely to involve several longer-term
changes in values and the structure and powers of other institutions as much as any specific
corporate governance reforms. For example, the recently issued Stewardship Code by the
UK’s Financial Reporting Council (FRC, 2010) represents an attempt to alter the relationship
between shareholders and management. The code is meant to encourage greater engagement
by institutional investors as active investors by requiring them to disclose their voting records
and to develop and publish protocols for constructively engaging with poorly performing
management teams. Even so, the new Stewardship Code does not address the implications of
the long-standing structural problems associated with the public good characteristics of
managerial monitoring, i.e., the problem of free-riders and the inevitable delays, risks and
high costs of intervention relative to exit (Forbes and Watson, 1993). In the absence of
increasing market incentives to become more active owners or significantly lowering
intervention costs, simply requiring institutional investors to provide more information
regarding their investment, monitoring and intervention policies, is unlikely to change in any
appreciable manner either institutional shareholder behavior or board member’s loyalty
biases.
For these latter changes to occur would probably require a complete rethink regarding
shareholder rights and how these rights can be effectively exercised and the continued
31
usefulness of the unitary board model which creates a conflict of interests for independent
board members. On the one hand, all board members have exactly the same legal
responsibilities for the management and good governance of the company whilst on the other
hand corporate governance codes also require the independent board members to monitor and
when necessary, to discipline the senior managers, i.e., their board-room colleagues with
whom they will have collaborated with in agreeing the firms’ current business strategy
(Ezzamel and Watson, 1997). Along with independent director only meetings and restricting
the job of independent board members to ratification, monitoring and disciplinary roles, that
is, activities intended to ensure that executives are accountable to shareholders for their
discretionary actions, would make it clear to both parties that the only legitimate loyalty bias
the independent directors ought to display is towards shareholder interests.
Finally, as in the case of Eisner’s reign at Disney, one of the first indications of an
increasingly dysfunctional management decision process was the departure of several key
individuals. This is because narcissists and bullies generally tend to distrust independent
minded colleagues and such people are encouraged to exit the firm whilst the former appoint
obsequious cronies whose fawning greatly reinforces the narcissist’s elevated opinion of
themselves. As Figure 2 suggests, when an inadequately controlled narcissistic incumbent
CEO is in charge, it is generally in the interests of firms’ shareholders to have in place robust
internal and independent whistle blowing procedures and employee protection schemes to
prevent victimization by their managerial superiors. Effective internal systems for reporting
wrong doing and unacceptable behaviour would perhaps both reduce many such forced
departures – which would require the individuals involved have the confidence that the
exercise of loyal voice would be effective and preferable to simply exiting – as well as
providing the independent directors with valuable and timely information from
knowledgeable insiders on the internal conflicts and consequences of the CEO’s stewardship.
The fact that many current independent directors would probably view a formal arrangement
of this nature which encouraged employees to blow the whistle on their management
colleagues as something intensely disloyal to these colleagues is perhaps an indication of
quite how far there is yet to go in realigning the interests and mindsets of directors more
closely to that of shareholders.
32
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35
Figure 1
The Toxic Triangle: elements in three domains related to destructive
leadership*
*(source: Padilla, et al, 2007, p 180)
36
Figure 2:
How exit affects the exit/voice trade-off
Voice
Exit with loyalty
Exit if no loyalty to company
N
Utter disagreement
Full agreement
Value of Voice
37
Figure 3
Disney share price sampled annually
each July from 1984 to 2005
150
100
50
0
1984
1989
1994
1999
Disney share price sampled annually each July
38
2004
30
30
20
20
10
10
Figure 4
0
Disney
Corporation’s performance relative to the S&P Composite
91 92
200
93 94 95 96 97
98 99
00 01 02 03
Price Index
04 05 06 07
0
08 09 10
200
150
150
100
100
50
50
91 92 93 94 95 96 97 98 99
RELATIVE TO S&P 500 COMPOSITE - PRICE INDEX
00 01 02 03
04 05 06 07
08 09 10
Source: Thomson Datastream
39
Figure 5
Disney's % annual return on investment,
1985 to 2005
25
% return
20
15
10
5
0
1985
1990
1995
2000
2005
Year
Walt Disney annual return on investment
Return on Investment = Pre-Tax Income/opening balance sheet Total Assets.
40
2010
Endnotes
1
Loyalty in Hirschman’s view “holds exit at bay and activates voice” (Hirschman, 1970, pp
78). Nor need this source of “bias” be interpreted as irrational in the sense of serving no valid
purpose for as Hirschman points out (1970, pp 79) “loyalty, far from being irrational, can
serve the socially useful purpose of preventing deterioration from being cumulative, as it
often does when there is no barrier to exit.” That is loyalty can prevent a stampede to the
door frustrating any constructive attempt to raise competitive performance.
2
The UK’s Financial Reporting Council, as a consequence of its post Walker report (2009)
changes to the Combined Code, published a Stewardship Code for institutional investors in
July 2010. This Stewardship Code is effective immediately on a “comply or explain” basis
and is intended to improve the effectiveness of the dialogue between institutional investors
and company boards and the information provided regarding how institutional investors have
carried out their stewardship responsibilities.
3
CEO entrenchment and domination of the board tends to be associated with long tenure,
accrued equity claims (e.g., via awards of shares and/or options), the perception that current
corporate strategies and performance are good and the lack of alternative, influential, voices
on the board that routinely raise questions regarding the continued appropriateness of the
CEO’s actions or business strategies.
See for example, Richard Bradley’s account of Larry Summer’s brief period as President of
Harvard (Bradley, 2005) .
4
41